Article reprinted from: Xiao Za lawyer
Recently, the team has continuously received a large number of RWA project inquiries, with underlying assets being quite diverse, including agricultural products, real estate, precious metals, and even some projects that sound quite fantastical...
In fact, the team has previously made it clear that under the premise that China's announcements on 9.4 and 9.24 remain effective, except for RWA projects issued under strict review through the Hong Kong Ensemble sandbox, which possess a certain 'criminal risk resistance capability', other types of RWA are very dangerous (especially RWA projects issued to mainland residents).
Therefore, today the team will clarify which mainland assets can be used in the Hong Kong sandbox and which cannot, to help partners conduct business more efficiently and save on consulting fees.
01 Basic understanding: restrictions and judgment criteria for mainland assets doing RWA
First, clarify: assets that are physically located in mainland China and primarily operate for mainland residents can be RWA. Several successful RWA projects previously have already verified this.
However, there are indeed restrictions for assets located in mainland China that want to issue RWA in the Hong Kong sandbox. Based on the team's practical experience, the following three types of assets cannot do RWA:
1. Assets that do not comply with the laws of Hong Kong;
2. Assets that do not comply with the laws of mainland China;
3. Assets that are currently not suitable for issuance in Hong Kong.
Mainland assets issuing RWA in Hong Kong must comply with the 'dual compliance principle'
In fact, this logic is easy to understand; assets are located in mainland China, but the tokenized assets (tokenised traditional assets) are actually sold and operated in Hong Kong, and the entire financing chain crosses mainland China and Hong Kong, so it naturally needs to comply with the 'dual compliance principle'—the underlying assets must be compliant in mainland China and in Hong Kong.
1. Hong Kong regulatory aspects
Given that Hong Kong mainly undertakes the tasks of asset tokenization and financial operation in RWA projects, we need to pay special attention to the requirements of financial regulatory laws and regulations regarding the underlying assets when issuing financial products, such as (Securities and Futures Ordinance), (Banking Ordinance), (Insurance Ordinance), (Anti-Money Laundering and Counter-Terrorist Financing Ordinance), etc.
The team has previously mentioned that currently in Hong Kong, there are no clearly defined normative legal documents for the issuance and regulation of RWA, and it is still in the exploratory stage. Therefore, the review process for RWA projects in sandbox regulation still has situations of 'one project one discussion'. However, the absence of clear normative legal documents does not mean that everyone must cross the river by feeling the stones; understanding the consistent regulatory principles for financial assets in Hong Kong and referring to the specific issuance rules for similar financial products can greatly improve the success rate.
In principle, Hong Kong consistently applies the 'substantive regulatory principle' (also known as 'perspective regulation') to financial assets, which means that compliance is assessed based on the substance of the asset rather than its shell. It is not feasible to conceal an illegal core with a compliant appearance. Specifically, it must be judged based on the regulatory rules applicable to the physical assets corresponding to RWA. For example, if the underlying asset is a bond, then the audit norms applicable to the underlying asset are those of Hong Kong's (Securities and Futures Ordinance) and relevant normative documents.
2. Mainland regulatory aspects
Since the underlying asset's 'physical body' is located in mainland China, it is necessary to focus on the legality of the underlying asset itself and the legality of the operational methods, which need to be viewed from two aspects.
Regarding the legality of the underlying assets themselves, based on our (Civil Code) and relevant judicial interpretations and judicial practice experience, items can be classified into three types based on whether they can circulate and the scope of circulation:
Circulating items
Restricted circulation items
Prohibited circulation items
Circulating items refer to items that are legally allowed to circulate freely among civil entities; restricted circulation items refer to items with certain legal limitations on their circulation scope and degree; prohibited circulation items refer to items that are expressly prohibited by law from circulating and transferring. The team believes that items used for RWA should be 'circulating items' or 'restricted circulation items' with permission.
In practice, 'restricted circulation items' generally include:
'Prohibited circulation items' generally include:
In terms of the legality of operational methods, Hong Kong has cash flow requirements for RWA projects (all currently issued projects have actual application scenarios). Therefore, the underlying assets at the operational level must also comply with the laws of mainland China: stay away from the red line and obtain the necessary administrative permits for operations.
Assets that are currently not suitable for issuance in Hong Kong
These assets themselves have met the requirements of the 'dual compliance principle', but are not suitable for issuance in Hong Kong at this stage.
On the one hand, RWA in Hong Kong is still in the sandbox experimental stage, so caution is exercised in selecting underlying assets. The clearly recommended types of underlying assets are those with 'high-tech' and 'clean and green' attributes. Therefore, the team believes that at this stage, if one wants to issue RWA projects in Hong Kong, the underlying assets must meet at least one of the two requirements mentioned above, such as carbon emission rights, which although intangible, are closely related to green economy property rights.
On the other hand, some assets that want to be revitalized through RWA and cannot generate good cash flow are also not suitable for RWA in Hong Kong sandbox due to low probability. For example, some real estate with low economic value, no matter how much it is 'empowered' through emerging concepts, cannot change the reality that the market value of the asset itself is gradually declining. The possibility of issuing RWA for such assets is very low.
02 These specific mainland assets basically cannot do RWA...
After understanding the principles and standards for judging whether underlying assets can issue RWA, we will focus on answering recent inquiries about some assets that need to be discussed separately to save everyone on consulting fees.
Jewelry and cultural artifact RWA
Jewelry and cultural artifact RWA is a category with a large volume of inquiries, and it is also the most difficult to provide clear legal opinions on. This is mainly because the types of jewelry and cultural artifacts are diverse, the waters are deep, and various special restrictions are scattered across laws, judicial interpretations, administrative regulations, departmental rules, and national standards. If it is an uncommon category, generally, a lot of legal verification work is needed to provide opinions. Overall, at this stage, it is not recommended to use jewelry and cultural artifacts as underlying assets for RWA.
If the partner's assets fall into the following categories, they can be vetoed outright:
1. Gem products with gambling characteristics, which are generally those whose quality cannot be judged by appearance and must be cut to know the internal quality of the material or rough stone, such as jade rough stones, unpeeled green pine rough stones, unshucked pearl types, etc.;
2. Processed jewelry and jade items, such as B jade, C jade, etc.;
3. Biological products (organic gemstones) that are banned from sale by the state, such as ivory, hornbill products, conch, queen conch, corals, rhinoceros horns, tortoiseshell, copal resin, sea willow, amber pillows, amber powder, cinnabar, etc.;
4. Low-quality or processed jade or jade imitations, such as sodalite jade, Guatemalan jade, and heat-treated jade;
5. Pure gold, pure silver, and other precious metals that are specifically restricted or prohibited from circulation by state laws.
Intellectual property RWA
Intellectual property, such as copyrights, trademarks, patents, etc., have actually seen many projects in the overseas crypto asset circle. There are even several film projects that have achieved quick financing through tokenization methods. Currently, we have not seen successful cases regarding RWA projects in Hong Kong, but the team believes that intellectual property is not an impossible RWA underlying asset to explore. Each specific project should be analyzed individually; if the intellectual achievement has significant commercial value, it can be boldly attempted after regulatory norms are clarified.
Agricultural and agricultural product RWA
'Can sun-kissed green grapes do RWA?' Not long ago, a partner brought RWA promotional materials from a similar grape project in China to consult with the team. We do not evaluate specific projects, but from an abstract perspective on agricultural and agricultural product RWA projects, if the project meets the standards of technological ethics review, possesses high technological content and research value, and has good commercial value, it can also be boldly attempted after regulatory norms are clarified.
Pure conceptual RWA
Partners must understand one thing: RWA is not crowdfunding. For such projects, the team generally gives a direct negative opinion.
03 Final thoughts
To extend a point: for underlying assets that are neither in mainland China nor in Hong Kong, can they do RWA in Hong Kong? The team believes that currently there are no regulations that assets must be in specific locations to apply for Hong Kong RWA. From the perspective of Hong Kong's positioning as an 'international financial center', the location of the underlying asset itself should not be a condition that hinders RWA; authenticity, credibility, compliance, and investment value are the hard criteria.